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Placing stop losses I am starting with stop loss placement for a couple of important reasons. One, you always should think about risk before reward and you should be at least two times more focused on risk per trade than you are on reward. When placing stops, we want to place our stop loss at a logical level, that means a level that will both tell us when our trade signal is no longer valid and that makes sense in the context of the surrounding market structure. I want the market to show me that my trade is invalid by moving to a level that nullifies the setup or changes the near-term market bias. Let the market hit your predetermined stop loss which you placed as you entered the trade.
Exit manually because the price action has formed a signal against your position. Margin call because you didn’t use a stop and the market moved so far against your position that your broker automatically closed your trade. You feel emotional because the market is moving against your position. But, there is no price action based reason to manually exit. The purpose of a stop loss is to help you stay in a trade until the trade setup and original near-term directional bias are no longer valid. Many traders cut themselves short by placing their stop loss too close to their entry point solely because they want to trade a bigger position size. When you place your stop too close because you want to trade a bigger position size, you are basically nullifying your trading edge, because you need to place your stop loss based on your trading signal and the surrounding market conditions, not on how much money you want to make.
If you remember only one thing from today’s lesson, let it be this: always determine your stop loss placement before determining your position size, your stop loss placement should be determined by logic, not by greed. What that means, is that you shouldn’t purposely put a small stop loss on a trade just because you want to trade a big position size. Many traders do this and it is basically like setting yourself up for a loss before the trade even starts. Now, let’s go through some examples of the most logical stop loss placements for some of my price action trading strategies. The most logical and safest place to put your stop loss on a pin bar setup is just beyond the high or low of the pin bar tail.
1 to 10 pips above the high of the pin bar tail. The most logical and safest place to put your stop loss on an inside bar trade setup is just beyond the mother bar high or low. If you don’t understand inside bars yet, please read this article on trading the inside bar strategy. For a counter-trend trade setup, we want to place our stop just beyond the high or low made by the setup that signals a potential trend change. Look at the image below, we can see a downtrend was in place when we got a large bullish pin bar reversal signal. Naturally, we would want to place our stop loss just below the tail of that pin bar to make the market show us that we were wrong about a bottom being in place.
We often see high-probability price action setups forming at the boundary of a trading range. When a trending market pulls back or retraces to a level within the trend, we usually have two options. One is that we can place the stop loss just above the high or low of the pattern, as we have seen, or we can use the level and place our stop just beyond the level. Often, in a trending market, we will see the market pause and consolidate in a sideways manner after the trend makes a strong move. These consolidation periods typically give rise to large breakouts in the direction of the trend, and these breakout trades can be very lucrative sometimes. There are basically two options for stop placement on a breakout trade with the trend.
So, let’s say we have a price action trading strategy that’s very close to key level in the market. Ordinarily, the ideal stop placement for the price action setup is just above the high of the setup’s tail or the low of the setup’s tail, as we discussed above. Placing profit targets Placing profit targets and exiting trades is perhaps the most technically and emotionally difficult aspect of trading. The trick is to exit a trade when you’re up a respectable profit, rather than waiting for the market to come crashing back against you and exiting out of fear.